While the recent market rally is remarkable in terms of rapidity and momentum, major indices are still 30% or more off their peaks depending on country and sector. That has left some very large and stable companies with enormous dividend yields in historical terms. With conventional income vehicles paying near zero interest, for investors with a long term horizon, high yield Megacap stocks spread across diverse sectors could yield impressive, steady returns, especially if the momentum we've seen lately in equity appreciation wanes.
While high yield corporate bonds and tax-free high yield Muni Bond ETFs are at least in some way subject to interest rate risk with the Fed widely expected to increase the Fed Funds rate within the next few quarters, a gradual Fed tightening would have no immediate impact on the earnings ability of these companies to continue sustained dividend payouts.
I intentionally selected 10 large well-known names with the following characteristics:
- Market Cap $10 Billion or more
- 5% Yield or Higher
- Share Price over $10
- Spread Across Diverse Sectors
- International/Emerging Market Exposure
By building an even-weighted portfolio of 1-2 companies in each sector, an investor could reasonably build a high yield portfolio with multi-country exposure, some inflation protection, some defensive posturing and a 6% or higher income generation rate to boot.
5.60% (LLY) ELI LILLY
5.10% (BMY) BRISTOL-MYERS SQUIBB
6.60% (FTE) FRANCE TELECOM
6.10% (PGN) PROGRESS ENERGY
5.90% (EC) ECOPETROL
5.60% (BP) BRITISH PETROLEUM
6.90% (MO) ALTRIA
6.80% (RAI) REYNOLDS AMERICAN
5.90% (T) AT&T
5.70% (VZ) VERIZON
In looking at some of the names on the list, you may express concerns over the likes of say, AT&T's prospects given their blunders with iPhone 3G performance or Tobacco stock litigation risk, but in these cases, these risks are largely built into the current share price and are unlikely to face catastrophic risk any time soon. Recall, these large companies have large lobbying groups and decades of experience in navigating challenges to their interests.
Pharma appears to be relatively insulated from any further detrimental health care reform sentiment, as they struck a deal with the administration early on in the process preventing reimportation of drugs and price controls.
Retail investors with some unplanned FICA Limit cash from the end of the year or anticipated 1Q2010 tax return windfalls may want to consider starting a high yield portfolio to compliment existing growth stocks since income is often neglected in building a balanced portfolio.